For-Profit Colleges: A “Business Model” That Blew Up

Career Education, when it reported its quarterly financial results, shed more light on an industry that had ruthlessly taken advantage of quirks in the American way of funding higher education, and that, even more insidiously, had preyed on gullible prospective students who were desperately trying to better their lives. Then it handed the tab to the taxpayer who couldn’t say no. A perfect scam. And it contributed to a ruinous mountain of student loans.

In the halcyon days of 2010, Career Education had $2.09 billion in annual revenues. Then a free-fall. By September 30, quarterly revenues hit $333 million. Enrollment was down 23%, in the health education category 41%. An additional 900 people will be laid off, on top of the previously announced 1,300. The company will “gradually” close 23 of its 90 campuses. Red ink is gushing, with no end in sight. The stock has plunged from $70 in June 2004 to today’s 52-week intraday low of $2.60.

“The inflection we all expected in the second half of the year has not and will not occur,” said CEO Steve Lesnik during the earnings call. But he proudly claimed that “we made tremendous progress in creating a culture of integrity and compliance.” That, after they’d gotten tangled up in all sorts of new “issues” this year, such as a Veterans Administration audit “involving housing allowances for online students.” Indeed!

Career schools—culinary, health, and art and design schools—were one of the hotspots for abuse. Career Education admitted, for example, that it had inflated job placement rates for its graduates. In March, it agreed to settle a class action lawsuit for $40 million, involving one of its subsidiaries, the California Culinary Academy here in San Francisco. Former students alleged that they’d been bamboozled into enrolling by its claim that 97% of graduates found jobs in the field.

Turns out, that number included graduates who were working as wait staff, baristas, prep cooks, and the like. The complaint further alleged that the college fabricated outright some job placement data. The company’s new job placement rates are mostly below 65%, thus below the minimum required by the Accrediting Council for Independent Colleges and Schools.

But the company is moving forward: “Our goal is to no longer put disproportionate emphasis on starts and population,” explained CEO Steve Lesnik. Enrolling as many students as possible to grab their financial aid is apparently no longer top priority. We’ll see.

Career Education is in good company. The largest player in the industry, University of Phoenix, which is owned by Apollo Group, is also getting hammered by scandals and declining revenues. Enrolment has plummeted from over 400,000 students to 328,000. To halt the bleeding, it shuttered 115 locations in 30 states.

Corinthian Colleges got hit as well. One of its specialties was the Ability-to-Benefit program, under which students without high school diploma or GED had been receiving student loans and grants to attend classes though they had virtually no chance of graduating. As of July 1, 2012, the government shut off the spigot.

Now scrambling to get back on that gravy train, the school is offering free GED preparation programs to high-school dropouts, expecting for “some portion of successful GED completers to enroll” in its institutions. And it’s trying hard to sign up new students to pocket their financial aid: marketing and admission expenses were about 25% of revenues…. “Our mission is to change students’ lives,” the press release said.

Corinthian Colleges is selling some campuses and shuttering others, particularly in California where the crackdown has become more aggressive. For a reason: the out-of-money state is trying to rein in the cost of its Cal Grants, a financial aid system that ballooned from $915 million to $1.6 billion in eight years.

These schools are facing tighter regulations all around. On the federal level, the Department of Education, for instance, banned incentives paid to admissions reps or recruiters for the number of students they hoodwinked into enrolling. Pressures are rising to get these schools to prioritize student graduation and job placement, rather than just grabbing financial-aid money. But, as the financial results demonstrate, that push blew up their entire business model.

In its dazzling manner, the for-profit post-secondary education boom left behind a long trail of wrecked dreams, unfinished or worthless degrees, wasted time, and a huge pile of student loans resting on the shoulders of people who were unable to find jobs in the fields they’d studied and who are now unable to pay back these loans. In the process, these outfits sucked up taxpayer-funded state and federal financial aid of all types and made early investors and executives rich. At their peaks, the stocks were picked up by mutual funds and were thus sneakily stuffed into well-diversified portfolios and 401k’s, as recommended by all of Wall Street. Because somebody has got to buy this stuff on the way down.

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9 comments for “For-Profit Colleges: A “Business Model” That Blew Up”

kimsarah

Nov 14, 2012 at 9:19 am

Glad to see this scam — obviously backed by the "free market" Republicans and probably a large number of Democrats who want to destroy public education — is finally seeing the light of day. There seems to be a pattern here. A large puzzle that is starting to take shape. At the state level, the GOP-controlled legislatures want to divert money from public education to newly created for-profit and charter schools that will surely bleed public schools and help parents to pull their kids out of those nasty integrated public schools. They also want to sell "virtual" online teaching programs to states and local school districts. This is part of what Jeb Bush has been out promoting the past couple years. Unfortunately, guess who loses — teachers, our children and the taxpayers.After they're finished milking what they can from the ever-shrinking state and federal budgets, there will be similar results to these for-profit colleges — gushing red ink and then bankruptcy. The swindlers will be long gone to the sandy beaches of the Cayman Islands, while the taxpayers and another Democratic administration will be left to clean up the mess.Which also leads to a larger question of who is behind all this. Could it be Goldman Sachs, J.P. Morgan Chase and Morgan Stanley are orchestrating this scam in order to help feed their disgusting worldwide ponzi scheme? But first, we've got our fiscal cliff to deal with and a grand bargain to be made that will no doubt start the process of dismantling, then privatizing Social Security and Medicare to keep Wall Street happy in the meantime.

Ilia

Nov 14, 2012 at 1:10 pm

Great post.

Wolf Richter

Nov 14, 2012 at 3:10 pm

Kimsarah – You're exactly right when you point your finger at the likes of Goldman. Private Equity, the branch of Wall Street that Bain Capital belongs to, was deeply involved in the early stages of for-profit schools … and for-profit prisons (now also involved in a variety of scandals). It was a huge money maker at the time. But I have to say: it was bi-partisan. When it comes to money and Wall Street, it's always bi-partisan. Congress just can't resist.

JoJ

Nov 15, 2012 at 5:48 pm

"the out-of-money state is trying to reign in the cost of its Cal Grants"

Should be "rein in", not "reign in". Good article, by the way.

Wolf Richter

Nov 16, 2012 at 3:22 pm

Thanks, JoJ. Fixed it.

Chusie

Nov 19, 2012 at 12:35 am

At the end of the article is an ad for GlobeUniversity.edu.

Wolf Richter

Nov 19, 2012 at 5:33 am

Chusie – that's Google sarcasm. I take screenshots when I see them (Google serves different ads to different people). Like a sushi ad next to my article on nuclear contamination in Japan.

Josie

Nov 20, 2012 at 1:55 pm

Druckenmiller was right. Where possible, he shorted the for-profit sector…

Jo

Nov 30, 2012 at 3:24 am

Where is a comparable piece describing the cost of a "not-for-profit" or public college experience? How many students start but do not finish? How many languish for years racking up student loans? What is the placement rate for these schools? Why has the cost of public colleges risen so much faster that the cost of living? Why aren't these schools held to the same outcome standards?

Students are not always victims either as some of the game(scam) the system. Some for-profit-school students qualify for Pell grants, then drop the courses and demand refunds, pocket the cash and never intend to pay it back. All subsidized by Uncle Sam.